Alibaba and the twelve digits

49 Pages·2014·2.5 MB·English

ALIBABA AND THE TWELVE DIGITS
CONTENTS
Introduction 3
Hunting for treasure 4
 Why Alibaba could be China’s next $100 bln IPO
 Alibaba spots pricey treasure in Weibo’s network
 Alibaba’s next superlative: China’s top fee payer
 Alibaba tests the limits of non-bank banking
 SoftBank’s Alibaba stake both blessing and burden
The cave opens 15
 Alibaba’s triangular dealmaking adds to IPO quirks
 Hong Kong needs to defend shareholder democracy
 Alibaba’s big reveal: high growth, odd governance
 Alibaba finance arm better out than in for IPO
Risks and rewards 24
 Two deals Alibaba could strike in America
 Alibaba tries out role of the noble monopolist
 Jack Ma soccer buy does Alibaba investors a favour
 Alibaba is case-study in U.S.-China legal gulf
 The perks and pitfalls of depending on Jack Ma
Twelve digits, many questions 38
 Alibaba’s future doesn’t depend on magic numbers
 Yahoo’s Mayer nears post-Alibaba reckoning
 China’s e-commerce secret weapon: the delivery guy
 Alibaba payments clean-up makes for neater IPO
 Alibaba deal spree turns from romance to thriller
 Six steps to Alibaba’s twelve-figure valuation
BREAKINGVIEWS
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INTRODUCTION
BY PETER THAL LARSEN
AUGUST 28, 2014
NOTE FROM THE EDITOR
Breakingviews has been closely following Alibaba’s journey towards
an initial public offering for over a year. Back in April 2013, we started
digging into what the company might be worth. The article that opens this
collection is the result. To see how our view has evolved since then, check
out the piece that closes this book, “Six steps to Alibaba’s twelve-figure
valuation”.
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ALIBABA AND THE TWELVE DIGITS
HUNTING FOR TREASURE
WHY ALIBABA COULD BE CHINA’S NEXT $100 BLN IPO
BY JOHN FOLEY
APRIL 25, 2013
Could Alibaba be China’s next $100 billion stock market listing? The Hangzhou-
based e-commerce giant continues to be coy over when it will take the plunge. But
sooner or later founder Jack Ma will need to offer some kind of exit for his backers,
not to mention employees, and an initial public offering is the most likely solution.
Now is a good time to start asking how the company should be valued.
Alibaba’s main business is selling. Its Tmall online stores provide a
shop front for brands like Nike and Unilever, while Taobao is focused on
consumer-to-consumer trade. The closest U.S. peers might be Amazon
and eBay. Sadly for valuation purposes, there’s no perfect match: unlike
Amazon, Alibaba doesn’t hold inventory or manage warehouses, and unlike
eBay, it gets most of its revenue from advertising, not charging users.
What is Alibaba worth?
Flex the numbers to see what China’s e-commerce giant might fetch in an IPO
How fast can Chinese What is Alibaba’s “take” What operating margins What multiple of 2014
e-commerce grow in on transactions? can Alibaba achieve? earnings is Alibaba
2014? worth?
31% 3% 48% 30
50% 10% 60% 50x
10% 0% 20% 10x
Goods sold 2014 Revenue 2014 Earnings 2014 Implied value
$326bln $9.8bln $4.0bln $120bln
John Foley, Robyn Mak, Katrina Hamlin, C. Trevethan 07/05/2014

Note: Assumes 84% market share and 15% tax rate in 2014
Click on the graphic to view online, interactive version.
BREAKINGVIEWS
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HUNTING FOR TREASURE
Meanwhile, its range of services gets ever wider, and potentially harder
to value. As well as accounting for the majority of China’s e-commerce, a
market worth $204 billion in 2012 according to the China Internet Network
Information Centre, Alibaba now has a mobile operating system, offers
trade financing to vendors and may even start offering consumer loans.
The company’s chief strategist says it aims to be “the world’s biggest data
sharing platform”.
Magic number
Fortunately, there are two numbers that really matter. One is how much
Alibaba can sell. The other is what percentage “take” it gets from each
transaction on its sites. That take might come through advertising or
through transaction fees, or a mixture of both. But ultimately, it represents
the cash the company can squeeze out of its sellers. Other services like
lending may create revenue, but for now they are mainly ways to lock in
users and maintain market share.
Consider a back-of-envelope valuation exercise. The first question is how big
the overall market can get. Say e-commerce in China grows 35 percent a year
for the next two years, and that Alibaba can keep its current market share of
around 80 percent. That would give it just under $300 billion of transactions in
2014 – over four times what eBay’s marketplaces handled in 2012.
Now imagine Alibaba can raise its “take” to 5 percent – roughly double
what it gets now. For now, Taobao sellers use the site for free, but having
reached critical mass, Alibaba should be able to exploit the “network
effect” of its 500 million users to generate higher income, either by
introducing transaction costs or selling more targeted ads. A 5 percent
“take” would still be just a third of what eBay gets from many of its sellers,
and would generate $15 billion of revenue for Alibaba.
The next question is profitability. Apply a 30 percent operating profit
margin – roughly the level in September 2012, the last period for which
there are reported numbers – and the 15 percent tax rate many of China’s
high-tech companies enjoy, and 2014 earnings would be $3.8 billion. On a
forward earnings multiple of 25 times, the recent average for listed Chinese
gaming network Tencent, that suggests a market value of $95 billion.
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ALIBABA AND THE TWELVE DIGITS
Opening sesame
In reality, many more factors will affect Alibaba’s magic number. Ma will need to
time the stock market cycle, but also the tech cycle. With many foreign backers,
Alibaba will most likely need to list on foreign markets, where stock buyers will
be influenced by what they think of China’s regulation, economy and accounting
practices. Valuations for companies like Baidu, Renren and Sina show gyrations
not always explained by the performance of their underlying businesses.
Valuations change quickly. Facebook’s went from $50 billion in its
fundraising at the end of 2010 to $104 billion at its IPO in 2012; the
company now trades at just two-thirds that value. When Yahoo recently
sold half its Alibaba stake back to the company, the deal valued the
company at just $40 billion. But a bilateral negotiation with a troubled U.S.
company is very different to a stock market listing.
Watch: Alibaba still needs Jack Ma
Alibaba may be undergoing a leadership change ahead of its anticipated IPO, but
the firm still needs its billionaire founder to smooth the way with Beijing, says
Breakingviews’ John Foley.
BREAKINGVIEWS
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HUNTING FOR TREASURE
Besides, internet companies are inherently volatile. Super profitability
attracts super competition, and disruptive technologies can take even
established models by surprise. Netscape and Microsoft both showed how
supposedly unassailable market positions can be lost as well as won. If a
twelve-digit valuation is within reach, it makes sense for Alibaba to open
the cave sooner rather than later.

ALIBABA SPOTS PRICEY TREASURE IN WEIBO’S NETWORK
BY PETER THAL LARSEN
APRIL 30, 2013
Alibaba has spotted hidden treasure in Sina Weibo’s social network. The
e-commerce giant is paying a punchy price for roughly 18 percent of China’s
microblogging phenomenon, a business that has not yet celebrated its
fourth birthday and is still working out how to generate revenue.
Alibaba has taken a positively contrarian view of Weibo’s worth. The $586
million investment implies a valuation of $3.26 billion – close to the entire
pre-announcement market value of Sina Corp, Weibo’s parent company.
The implication is that Sina shareholders are putting no value on the
company’s existing web portal business and $700 million in cash and short-
term investments. If Alibaba is right, the 9 percent jump in Sina shares on
the news is far too stingy.
Weibo’s new valuation looks demanding, however. Like their counterparts
at Twitter and other Western equivalents, the company’s management
is struggling to convert enormous clout on the web into cash in the bank.
Weibo started experimenting with ads last year. In 2012, they provided just
12 percent of Sina’s advertising revenue – about $50 million.
The investment has potential benefits. It could help point Weibo’s 46
million daily users towards Alibaba’s online stores, or give retailers
seamless access to Weibo’s platform. The two reckon such vague synergies
will generate more than $120 million in additional annual revenue for
Weibo over the next three years.
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ALIBABA AND THE TWELVE DIGITS
Weibo Corp Chairman Charles Chao poses on day one of Weibo’s IPO on The NASDAQ Stock Market
in New York, April 17, 2014. REUTERS/Andrew Kelly
But Alibaba may be thinking less about gains than about potential losses.
Roughly four out of every five yuan currently spent on e-commerce in China
travel across its platforms. Alibaba wants to defend this from potential
rivals such as Tencent, which has captivated users with its WeChat free
mobile messaging service. WeChat doesn’t currently enable e-commerce,
or make any money, but such innovations cannot be ruled out. With a high-
profile initial public offering in the works, Alibaba could use Weibo to give
its own mobile strategy a boost.
Even so, more than half a billion dollars in cash – more if Alibaba exercises
an option to raise its Weibo stake to 30 percent – remains a big bet. Alibaba
must hope that its prospective investors share its enthusiasm.
BREAKINGVIEWS
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HUNTING FOR TREASURE
ALIBABA’S NEXT SUPERLATIVE: CHINA’S TOP FEE PAYER
BY JOHN FOLEY
MAY 20, 2013
Alibaba’s initial public offering is going to be less about the forty thieves,
and more about the fight for fees. The unlisted Chinese e-commerce giant
is already an important source of advisory and financing revenue in a weak
market. If a highly anticipated stock market listing comes to pass, it could
become China’s biggest payer of fees to global investment banks in a
decade.
Alibaba and the fight for fees
Top investment bank fee payers in China and Hong Kong, 2003-2013, US$mln
800
700
600
500
400
300
200
100
0
CNOOCAlibaba State Ag. Bank AIA Sinopec CITIC China Bank of Hutch. Alibaba ICBC CNPC
Group* Grid of China Construc. China Wham. Group
Bank post
theoretical
IPO**
Totals include M&A advice, plus fees for for arranging and underwriting debt and equity issues.
*Includes arrangement fees for $6.5 billion syndicated loans, at estimated 1.7pct
**Includes fees for theoretical $15 billion IPO at 1.75pct rate of commission
Catherine Trevethan / John Foley / Robyn Mak
Source: Thomson Financial/Freeman & Co/Reuters Breakingviews estimates
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ALIBABA AND THE TWELVE DIGITS
As the company has expanded, Chairman Jack Ma has overseen the listing
and de-listing of subsidiary Alibaba.com, the arrangement of a $3 billion
syndicated loan, the restructuring of payment engine Alipay, and a buyback
of shares from U.S. investor Yahoo. Such deals generated combined fees
of $176 million since 2007, according to Thomson Reuters Freeman data,
based on public disclosures and proprietary estimates. That’s more than
any other non-state Chinese company over the same time.
The treasure keeps coming. Alibaba recently secured another $6.5 billion
syndicated loan from a consortium led by nine banks, according to IFR.
Based on an average arrangement fee of around 1.7 percent, the payday
was worth about $110 million.
The next big event could be an initial public offering. The company doesn’t
comment on its plans. But given that valuation expectations range from
$60 to $100 billion, it’s no stretch to think that Alibaba and its backers
could sell $15 billion of stock, a bit less than Facebook did in 2012. Apply a
1.75 percent commission, and the spoils could be $260 million.
All in, that would take Alibaba to roughly $550 million in fees over a decade
– ranking only behind oil producer CNPC and lender ICBC in Greater China.
Moreover, unlike Alibaba, CNPC and ICBC have paid the lion’s share of their
fees to domestic institutions.
Even after an IPO, Alibaba is likely to continue generating fees from
acquisitions and share trades, as big shareholders like Yahoo sell down.
Little wonder, then, that battle lines are already being drawn. SoftBank,
the Japanese company that owns a third of Alibaba, recently warned banks
not to finance a rival bid for U.S. telecom Sprint, or risk being left out of the
e-commerce giant’s flotation, sources told Reuters.
That may be an idle threat, but given Alibaba’s prospects, few investment
banks would be prepared to put it to the test.
BREAKINGVIEWS
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